The Business Advisory Blog

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Insight, news and updates from Alliott NZ Chartered Accountants, Auckland New Zealand. The views expressed here are the views of the author and should be discussed in further detail should an article be relevant to your individual circumstances.

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

Introduction

Managing cash within your business is the key to progression. It makes a huge difference to having enough cash to reduce debt, fund expansion plans, invest, or provide a return to stakeholders.

Here's six tips to help you manage it better so you can do the things that you want to do with your business.

1. Make it easy for your customers to pay you

If you make it easy for your customers to pay you, its more likely that they'll pay you on time. You can do things like:

Accurate preparation of tax invoices and promptly forwarding these to your customers.

Making provision for direct credits to your bank account and also offering credit card facilities.

Offer a prompt payment discount.

Using Xero to pay online from within your invoice.

2. Make a point to chase unpaid bills on a regular basis

Ensure follow-up of customers'/clients' invoices from the due date to ensure prompt payment or, if the customer/client has a query, you resolve the query as soon as possible

Ensure any payment arrangements made with a debtor are confirmed in writing, including details of any key dates and follow up with the customer to ensure that payments are made on those dates

Monitor debtors' aged analysis on a weekly basis and calculate average debtors' days outstanding and try and maintain your business' terms of trade.

If payment is not received, ensure prompt referral of problem debtors to a debt collection agency

3. Put together a cash flow forecast

A cash flow forecast is a key diagnostic tool for the health of a business.

When putting together a cash flow forecast it is best to:

Keep it simple and focus firstly on the items that affect your cash flow the most

Compare forecasts to actuals and consider any changes required for preceding months' forecasts

For example, if you find that your customers are delaying their payments, communicate with them; find out what the problem is and whether you can negotiate alternative arrangements regarding payment. Don't sit back and wait, because it might be too late. Keep an ear to the ground as to what is happening in the market place and, in particular, how your key customers are trading.

Once you understand how cash moves through your business, you can start taking action to increase cash flow.

It is recommended that you prepare a three monthly Cash flow Forecast on a monthly basis. This forecast should be closely analysed to determine whether specific action is required.

The appropriate person should then monitor actual performance against the three monthly forecasts and should instigate action to achieve the targeted performance. We can certainly help you to monitor your cash flow.

4. Take a closer look at your stock/inventory

One of the areas where considerable cash can be invested is stock. So, it's a good idea for you and your management team to keep an eye on your investment in this area. Work to improve your inventory forecasting and order less stock more often to ensure you only have what you need on hand.

Some controls you can put in place to reduce your investment in stock include:

Weekly monitoring of your investment in stock

Weekly/monthly reviewing of stock-turns being achieved for individual items or groups of stock

Regular identification of slow-moving or obsolete stock

Relocating stock to try to encourage customers to buy those items of stock

Conduct of sales to try to sell slow-moving stock items

Carefully analyse the investment in top-range products.

5. Work with your suppliers

Its always a good idea to have a solid working relationship with your suppliers. They are likely to give you better payment terms over time if you have a great track record with them. The simple and best way to do this is by paying them on their terms and on time.

Other ways to work a good relationship to your cash advantage is to ask for:

Promotional support from them

Specialist staff to train your team members in the use of the products/services

Advertising and marketing contributions

One other thing you can do here to improve your cash situation, is to make a point to regularly compare prices for products/services from different suppliers in an attempt to lower purchasing costs.

6. Freeing up cash from Work in Progress

A regular review, at least every month, on the jobs that are still within ‘work in progress’ can make a big impact on your cash position. Things you can look at during your review include:

Can the job be invoiced?

Can a progress claim be raised?

Is there a problem within a job that is causing a delay with finalising the work? If so, what's the potential of it creating a loss on that job.

Considerable sums of money can be tied up in work in progress. If you do use a work in progress system, it is important to try and minimise the investment within work in progress so it makes an improvement on your business's cash flow performance.

For more information on how to manage your cash better, please call us on +64 9 520 9200 or email us at enquiries@alliott.co.nz.